We’ve said it before and we’ll say it again: if you are in commercial finance, you need to be thinking about fair lending and anti-discrimination laws. First and foremost, the Equal Credit Opportunity Act (ECOA) applies to both consumer and commercial credit. Indeed, the first sentence of ECOA states that “[i]t shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction[,]” on the basis of a protected characteristic. 15 USC § 1691(a) (emphasis added).
However, regulators—in particular the CFPB and the FTC—have made it clear that their ability to police purportedly discriminatory acts and practices extends beyond credit products through the federal prohibition on Unfair, Deceptive, and Abusive Acts and Practices (UDAAPs). In 2022, a collection of trade groups sued the CFPB in the United States District Court for the Eastern District of Texas, challenging a revision to the bureau’s exam manual stating that discriminatory practices related to both credit and non-credit products were “unfair” under the federal prohibition against UDAAPs. The trial court held that the CFPB had exceeded its authority in updating the exam manual.
The CFPB, however, is now pushing back, arguing in its appeal to the Fifth Circuit that the trial court’s decision will prevent the bureau from ensuring that banks and non-bank financial institutions do not discriminate with regard to non-credit products. According to this recent summary from Law360, the CFPB lists several hypotheticals involving non-credit products. For instance, according to the Bureau, it could not investigate intentional discrimination in instances where a “payments company refused to serve African Americans” or where a “prepaid card issuer charged higher fees to men.” Rather, it claimed that “Congress created no exception to unfairness for discriminatory acts or practices, and it was not the district court’s job to create one.”
To be sure, and as we have discussed on multiple occasions, there are myriad arguments as to why UDAAP is a legally improper vehicle with which to police discriminatory acts and practices. However, the CFPB’s recent arguments on appeal highlight the fact that regulators will continue to aggressively pursue alleged discrimination. This includes discrimination in both the consumer and commercial credit contexts and in the non-credit context as well. For commercial finance companies, taking care to understand your fair lending and anti-discrimination risk is doubly important because, with the advent of Dodd-Frank 1071, regulators will soon have the type of data required to bring disparate impact claims against small-to-medium size business finance companies.
In light of the looming deadlines for Section 1071 compliance, our team here at Husch Blackwell will be hosting a free webinar Thursday, August 29 from 12:00pm to 1:00pm CT on Section 1071 compliance. We will focus specifically on compliance strategies for fintech and alternative commercial finance companies designed to manage litigation, compliance, and reputational risk. A formal invitation and registration form will be available soon—so be on the lookout!
News and views
Credit Risks Likely to Rise as 2024 Draws to a Close: What does the Red Sea have to do with credit quality in the United States? Turns out, potentially quite a bit.
Our partners Michael D. Fielding and Brent T. Salmons assess the risks facing the current commercial credit market through the lens of recent attacks on international shipping by Houthi rebels and a potential Gulf Coast-wide strike involving the International Longshoremen’s Association. According to our partners,
This pull-forward is forcing companies to make longer-range inventory and sales projections for the holiday season. For consumer-adjacent businesses, like retail, this can be a risky practice, especially as recent data suggest a softening of consumer demand in the U.S. If this earlier-than-usual inventory build miscalculates holiday demand, the results could be severe, especially for enterprises that are already struggling with financial distress, which are growing in number. In 2023, corporate bankruptcies reached levels not seen since 2011, and the first half of 2024 is trending above last year’s level.
Against this backdrop, the article discusses ways that commercial lenders to consumer-adjacent businesses can assess credit risk, ensure proper loan documentation, and monitor borrower financial health to mitigate potential defaults.
Jay Jacquin, Offense or Defense? A Playbook for Lender-Owned Businesses, ABF Journal
Jay Jacquin at Configure Partners addresses the difficult but inevitable reality of lenders having to take control of an underperforming borrower company. Particularly helpful here is Mr. Jacquin’s discussion about how lenders, who so often focus on the defensive solution (i.e. stabilizing and selling the business), can identify candidates with whom it can play “offense” and attempt to turnaround and grow the business: “[b]y choosing to play offense, [the] plan must include considerations such as capital expenditures with a focus on return on investment, the addition of new production lines, sales improvements, system enhancements, and even new markets.” This article is definitely worth a close read!
Alex Johnson, Congress is Actually Trying to Do Something!, Fintech Takes
Alex Johnson over at Fintech Takes flags a recent bipartisan effort in Congress to propose a fintech “regulatory sandbox” that would allow financial services companies to experiment with artificial intelligence. According to Punchbowl News, “[t]his sandbox bill . . . would allow firms to apply and ‘experiment with AI test projects without unnecessary or unduly burdensome regulation or expectation of retroactive enforcement actions.’” Mr. Johnson states, and we would agree, that he would “prefer that we create a space for responsible actors to innovate in these areas—for the benefit of customers and the utter ruination of fraudsters—under controlled conditions, with consumers who fully understand and accept the risks that they are taking.” We hope to see this concept continue to develop, especially in light of the interesting potential for AI in the commercial finance space that we have discussed here.
IFA Webinar – Maximizing Lending Opportunities with Participations
On August 21, 2024, from 11am to 12pm PT, the IFA will be holding a webinar “on how participation solutions can transform your business.” The webinar is free for IFA members and $100 for non-members. Jacob Ladner, CEO of Thirdmark Capital, will discuss the intersection of factors and participants, details regarding underwriting a participation, the pricing structure of a participation, and the normal reporting requirements associated with a participation. Participations are critical in instances where a potential factoring deal might exceed the factor’s top-line transaction limit, and it’s our experience that these deals are becoming more prevalent due to inflation and tightening credit markets. As such, this webinar will no doubt be full of helpful information.
News you can bank on
Interested in more updates on the financial services industry? Subscribe and receive Husch Blackwell consumer financial services insights in your inbox.